15 September 2015

Trading Forex: How to trade with leverage

Speculative FX trading is traded on margin. This means that you are able to leverage your investment by opening positions that are larger in size than the cash on your account.

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You are said to be leveraged or geared when you are trading with borrowed money. Many traders use leverage because, in general, currency pairs make only very small moves day to day, so leverage is a way to make more money from these incremental price changes.

Leverage amplifies both profits and losses, so it can be dangerous if not handled correctly, and you could lose more than you actually deposited. If you deposited £1,000 and your broker allowed you leverage of 100:1, you would actually have £100,000 to trade, and your margin ​- the money your broker requires for you to open a position - would be 1%. If, at any point, the equity in your account is not enough to cover a possible loss, your broker can step in and liquidate your trades - this is a margin call and can be very expensive and painful if your losing trade is closed out before it has a chance to rebound.

To help manage leverage, you might need to use stop loss orders to limit the amount of money you could potentially lose on a trade, and keep close tabs on your account balance at all times.

You can access much higher leverage in the FX market than in any other - some brokers will offer 500 times leverage or even more. This is why small, retail traders are becoming increasingly attracted to FX, where they tend to get access to higher levels of gearing than they would elsewhere and potentially greater rewards - as well as, of course, greater risk.

 

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The value of your investments can go down as well as up.
Losses can exceed deposits on margin products.
Please ensure you understand the risks.

Disclaimer: This material should be considered as a marketing communication under the Financial Conduct Authority's rules. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, nor is it subject to any prohibition on dealing ahead of the dissemination of investment research. Saxo Capital Markets UK Limited ("SCML") undertakes reasonable efforts to ensure that any information published in this communication is reliable. SCML makes no representation or warranty, or assumes no liability, for the accuracy or completeness of any information contained in in this communication.

SCML provides an execution only service and this communication does not take into account any particular recipient's investment objectives, special investment goals, financial situation, and special needs and demands and nothing herein is intended as a recommendation for any recipient to invest or divest in a particular manner and SCML assumes no liability for any recipient sustaining a loss from trading in accordance with a perceived recommendation.

Saxo Capital Markets UK Limited is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871

The value of your investments can go down as well as up.
Losses can exceed deposits on margin products. Please ensure you understand the risks.